The world’s second-largest economy exhibited strong performance in the first quarter. Strength in consumer spending drove expansion and overshadowed the troubles facing the economy.

However, this was not enough to convince pessimists of a brighter future, as they questioned the impact of the trade friction and high debt on the economy.

Into the Headlines

China’s economy grew 6.8% year over year in the first quarter, slightly slower than 6.9% reported in 2017. Moreover, first-quarter data was above the 2018 target of 6.5%.

Exports led the way for China’s economic expansion in the quarter, as it grew 14% in the first quarter compared with 8% in the prior-year quarter. However, the outlook for this space remains cloudy, owing to increasing trade tensions with the United States.

Producer prices slowed to a 17-month low of 3.1% on a year-over-year basis in March compared with 3.7% in the previous month. Moreover, consumer prices increased 2.1% in March compared with 2.9% in February. The numbers in February seemed to be distorted, owing to a one-off increase in demand due to Lunar New Year celebrations.

Although consumer spending increased 9.8% in the quarter, it was below the 10.0% growth registered in the year-ago quarter. Moreover, investments in roads, airports and other infrastructure slowed to 13.0% compared with 23.5% in the year-ago quarter. The relative weakness in these numbers support the prediction of a slowdown in the coming months.

“March data point to nascent signs of a growth slowdown underway, led by old economy sectors,” per a Bloomberg article, citing a statement by Rob Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc.

Risks Involved

From a domestic perspective, the Chinese government is aiming to crack down on high debt levels and pollution intensive industries to transform the manufacturing oriented economy to a more balanced one. President Xi Jinping’s aim to shift the economic growth drivers to quality instead of just quantity by cracking down on pollution might initially lead to a gradual slowdown in economic growth.